Question

The value of the multiplier associated with changes in autonomous spending is given by k.

a) Find the value of the multiplier when MPC=0.50, 0.75 and 0.80.

b) What is the relationship between the value of the multiplier and MPC?

c) Find the change in equilibrium level of output when there is a k10 000 increase in investment spending and MPC=0.50, 0.75 AND 0.80.

Answer 1

a) Multiplier formula;

$K=1/(1-MPC)$

K is multiplier

MPC is marginal propensity to consume

$K=1/(1-0.5)$

$K=2$

$K=1/(1-0.75)$

$K=4$

$K=1/(1-0.85)$

$K=6.7$

b)

Multiplier is directly related to marginal propensity to consume,the higher the multiplier,the higher the marginal propensity to consume and vice versa.

c)

Since the initial increase in spending is k 10,000 and the multiplier is 2, with Mpc of 0.5

the change in equilibrium output will be:

$2*10,000=20,000$

Spending is k 10,000 and the multiplier is 4, with Mpc of 0.75

$4*10,000=40,000$

Spending is k 10,000 and the multiplier is 6.7, with Mpc of 0.85

$6.7*10,000=67,000$